INCOME FROM SALARY

Objectives
1. When the salary income is chargeable to tax
2. The concept of profits in lieu of salary
3. The various retirement benefits which will be charged as salary
4. The concepts of allowances and perquisites
5. The admissible deductions from salary

What Constitutes Salary ?

Every Payment made by Employer to his employee for the services rendered
Includes Monetary and Non Monetary benefits.

** Conditions for Taxability of Income :

1. Employer Employee Relationship
2. Employment may be Full time or Part time.

Foregoing of Salary - Just application of Income Hence Taxable

Surrender of Salary Exempt
Under section 2 of the Voluntary Surrender of Salaries (Exemption from Taxation)
Act, 1961, the salary so surrendered would be exempt while computing his taxable income.
Salary Paid Tax Free : Employer bears the burden of employees income tax - Then income in
the hands of employee will be ______________ ??
Contract-OF-Service Salaries
Contract-FOR Service Business / Profession

Components of Salary : Definition under section 17(1) : Salary Includes

1. Wages,
2. Any annuity or pension,
3. Any gratuity,
4. Any fees, commission, perquisite or profits in lieu of or in addition to any salary or wages,
5. Advance of salary,
6. Leave encashment,
7. Interest on Recognised Provident Fund
8. The contribution made by the Central Government or any other employer in the previous
year to the account of an employee under a pension scheme referred to in section
80CCD.

IN SIMPLE WORDS :
Income/Benefit that is received/receivable in Past Present Future - In cash or Kind
Taxable under the head salary**

Basis of Charge
Salary is chargeable to tax either on due basis or on receipt basis whichever is earlier.

Advance Salary : April months salary received in month of March - ?

Arrears Salary : Year -2014 Salary Received in Year 2016 ?

Loan / Advance Against Salary : Is it Taxable as Salary Yes or No

Palace of Accrual of Salary :

Salary earned in India is deemed to accrue or arise in India even if it is paid outside India or it is
paid or payable after the contract of employment in India comes to an end.

Profits In Lieu of Salary

Compensation In connection with
1.Termination of Employment
2.Modification of Terms of Employment
*Sum Received under Keyman Insurance Policy including bonus, benefits etc
*Any lump sum received before joining or after cessation of employment.
*Benefits from Unrecognised Provident fund.

Allowances
Given to employees to meet some particular requirements like house rent, expenses on uniform,
conveyance. Etc
FULLY -TAXABLE ALLOWANCE :
1.Entertainment Allowance*
2.Dearness Allowance- (DA)
3.Overtime Allowance
4Fixed Medical Allowance
5.City Compensatory Allowance
6.Interim Allowance (to meet increased cost of living in cities) ETC

PARTLY TAXABLE ALLOWNACE:

1. House Rent Allowance Section 10(13A)
2. Special Allowance exempt to the extent spent.

Fully Exempt Allowances:

*Allowance granted to Government
employees outside India.
* Allowance paid by the UNO

*Sumptuary allowance granted to High Court

or Supreme Court Judges
*Compensatory Allowance received by a judge

Perquisites : Section 17(2) Read with Rule 3 for Computation Mechanism

The term perquisite indicates some extra benefit in addition to the amount that may be
legally due by way of contract for services rendered.
In modern times, the salary package of an employee normally includes monetary salary and
perquisite like housing, car etc
Perquisite may be provided in cash or in kind.
Reimbursement of expenses incurred in the official discharge of duties is NOT a perquisite.
Perquisite will become taxable only if it has a legal origin.
Income-tax paid by the employer out of his pocket on the salary of the employee is a
perquisite in the hands of the employee whether the payment is contractual or voluntary.

Retirement Benefits
Gratuity Read with- Payment of Gratuity Act 1972
Pension
Provident Fund : Read with Employees Provident Fund and Miscellaneous Provision Act
1952.
Leave Encashment / Salary: